Clementi 10 years on (and now for the next 10)

This month marks the tenth anniversary of the publication of Sir David Clementi’s final report on the regulatory framework for legal services in England & Wales.  How time flies!  The report is still a good read, and a helpful reminder of what needed to change – and why.

The report laid the foundations for the Legal Services Act 2007 (even though the Act went further on alternative business structures than Sir David was willing to recommend).  Its principal aims can be summarised as:

  • creating the Legal Services Board and establishing the principle of regulation that is independent from professional representation
  • improving the way in which – and the speed with which – complaints against legal services providers are handled, including setting up the Office for Legal Complaints and the Legal Ombudsman
  • liberalising the business structures through which lawyers can operate by permitting ownership and investment by individuals who have not qualified as lawyers, and allowing legal businesses access to external capital.

All of these primary objectives have been achieved – more or less.  So what now?

The Clementi report was inevitably built on compromise.  Although considered by some at the time to be too radical (witness the howls of protest and the resistance mounted against the report and its implementation), it was in fact the considered articulation of the incrementally possible.  That the then government felt it necessary to go further than Sir David’s recommendations on alternative business structures (ABS) perhaps demonstrates how restrained he had been.

What has happened since 2004?

Contrary to some predictions, the sky has not fallen in: law firms have not been taken over en masse by crooks and charlatans; lawyers’ ethics have not been abandoned in the pursuit of profit; and the price and quality of legal services have not plummeted to the lowest common denominator.  In fact, in 2014, price and quality seem more at risk because of the effects of changes to public funding than from the proposals for ABS made in 2004.

The Clementi Review and the Legal Services Act were a necessary wrapper for the process of market liberalisation that was long overdue in legal services.  But they were just that: enablers and not causes.  Liberalisation and innovation would have happened anyway – though perhaps the regulatory settlement of the Legal Services Act would have been different in tone, form, and content had it been created in the aftermath of the global financial crisis rather than before it.

Even so, that crisis has, in itself, increased pressures on the pricing, quality and delivery of legal services.  It has accelerated and exacerbated competition for a decreasing volume of external legal advice.  Consolidation, better and more extensive use of technology, alternative providers, value pricing and project management have all driven restructuring, mergers, the need for capital investment, and the reshaping of traditional partnerships and their distorted profit-sharing arrangements.

The world is not the same – and would not have been the same – even without the Legal Services Act and its regulatory reforms.  Indeed, arguably, because the Clementi Review had encouraged more enlightened law firms to start their thinking about new ways of being and working, they were in a better shape to ride through the financial crisis and its consequences than they would have been without it.

So liberalisation and innovation are with us.  The doubters will point to some ABS failures and challenges and claim that they were right to resist.  For example, Indeed Online plc was sold back to its founders, Cooperative Legal Services had some wobbles when its parent was affected by banking fall-out, Hacking Ashton went into liquidation, GPB Solicitors had its ABS licence revoked, Sai-Donne Ltd was closed, and Quindell continues to have difficulties.

Certainly, these are all disappointments.  But one could also argue that the causes are the result of an effective market, and that the actions taken are a sign of a strong regulatory framework, not a weak or inappropriate one.  Let us also not forget the collapses and mishaps of Halliwells, Cobbetts and other non-ABS law firms.  In truth, commercial success and failure – or regulatory compliance and ethical behaviour, for that matter – have nothing to do with whether or not the business holds an ABS licence.

Where are we now?

Clementi’s work and the 2007 Act were necessary contributors to balanced and regulated market liberalisation.  The key words here are ‘balanced’ and ‘regulated’.  The reforms did not create a liberated free-for-all.  They were not the pursuit of consumerism and profit at the expense of everything else; nor were they the end of professionalism and ethics in legal practice.  They were part of the enabling framework that allowed a new future to evolve.

However, with the benefit of 10 years’ hindsight – although much has been achieved and progress made – the consequences of the 2004 compromises and the limitations of the 2007 regulatory settlement are now inhibiting a more effective future.  More particularly:

  • the Act’s regulatory objectives are in places conflicting with each other, too extensive, and impractical – and therefore do not provide the over-arching direction or guidance that they should
  • building the entire regulatory framework around the historical, anachronistic, and limited list of reserved legal activities cannot hope to provide a balanced, comprehensive or sustainable foundation for modern, effective regulation
  • a continuing maze of regulation by activity, individual, entity, and professional title will struggle to meet any objectives of clear, targeted, proportionate, consistent, accountable, cost-effective and less burdensome regulation
  • the ‘regulatory gap’ that allows some legal services to be beyond the reach of the regulatory framework is not justifiable or tenable
  • the independence of regulation from professional representation is not complete
  • the multiplicity of regulators (with the resulting potential for overlap, inconsistency, regulatory competition and arbitrage) needs closer examination, perhaps along with the parallel structures for claims management and immigration
  • the over-prescription of regulatory requirements in statute needs to be questioned
  • having a series of statutes (including the Public Notaries Act 1801, Commissioners for Oaths Act 1889, Solicitors Act 1974, Administration of Justice Act 1985, Courts and Legal Services Act 1990, as well as the Legal Services Act 2007) which collectively constitute the regulatory framework for legal services does not advance the general cause of consolidated, simple and accessible legislation.

If the period since 2004 has passed by in the blink of an eye, the nature and pace of change in legal services since then leaves me in no doubt that well before 2024 we will need a different and more robust framework for legal services regulation.

Where do we go next?

While it might seem a little premature so soon after 2007 to be considering what could follow the Legal Services Act after next year’s general election, the flaws and fudges on which the Act was necessarily built will not allow us to wait too much longer before turning attention to its successor.  The 2007 Act was not party political legislation, so we have no reason to think that the near future will be entirely dependent on the colour (or mix of colours) of the government from next May.  What is more important, perhaps, is the preparation that goes into the amendments or replacement.

As part of that preparation, I am honoured to be chairing and facilitating a review process starting in January that will see the Legal Services Board and the front-line regulators develop a set of legislative options (not a fully worked-up alternative structure) that a new government could consider as part of the next iteration of legal services regulation.  Hopefully, the results will address the limitations of the current framework, use the benefit of experience from the past ten years, and anticipate the issues and flexibility required to sustain a new regulatory settlement.

So, ten years on, we should thank Sir David Clementi for giving us the platform from which to develop, liberalise and innovate.  And we must now welcome and seize the opportunity to reflect, learn from experience, and improve for the next ten.  As for exactly what follows … watch this space!

3 thoughts on “Clementi 10 years on (and now for the next 10)

  1. We did a survey of our audience recently at LPM magazine – those readers would tend to agree with much of what you say here about the current regulatory framework, specifically around the overlapping range of regulators, and the regulation of reserved legal activities versus new entrants beyond any of these frameworks.

    Readers rated the LSA’s success against the Clementi review in three of its main objectives: promoting competition, promoting innovation, and promoting the public and consumer interest in the legal sector. The results are interesting, albeit with a deep strain of skepticism undercutting the change wrought on the market – for example, the Act’s success in promoting public and consumer interest got a score of 3.9/10. The other areas fared only slightly better.

    For anyone interested in those results, they can be found here in December’s issue:

    http://www.legalsupportnetwork.co.uk/general/resources/lpm-magazine-december-2014-here-clementi

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